The Great Tether Bamboozle and the Future of On-chain Fiat/Stablecoins.
With all the accusations of Tether’s insolvency and pumping of BTC, the main question that still bamboozles me is the validity of the USD Tether peg.
Tether is not redeemable for USD. I repeat, Tether is not redeemable for USD.
First question I ask is: has anyone ever redeemed USD for Tether? And I don’t mean the USDT/USD exchange on Bitfinex (Tether’s sister company*):
Why? Because Bitfinex does not have any USD fiat gateways. In other words , Bitfinex has no way of transferring USD to your bank account. Bitfinex’s USD withdrawals have been suspended for over six months now. Bitfinex never found a way to provide customers with USD withdrawals, and eventually shuttered its doors to US customers.
With no USD fiat gateway, I find it dubious that Tether can live up to its now very misleading name, as there is no real peg for USDT to USD. If you purchased USD with USDT on Bitfinex, there is no way for you to withdraw that USD from Tether. All you are doing is exchanging USDT for USDT. Without a real peg, Tether is effectively minting its own USD by taking in USD (if any) and handing out IOUs with no redemption value. The only way to get value out of USDT is to pass it along to other users, with someone eventually holding the bag.
Even more misleading is Tether’s own FAQ on redemption:
Special focus on the Terms of Service provision:
There you have it, in addition to having no real way withdraw USD from USDT from Tether/Bitfinex, you likely will have a long, drawn out legal battle with Tether and co. to demand legal relief if and when Tether implodes. MT. Gox 2.0.
Knock-on Effects
While a collapse of Tether/Bitfinex alone would likely cause short term havoc, the real problem is the contagion in the ecosystem. Many, if not most of the centralized exchanges utilize USDT over USD. This includes HITBTC, Bittrex, Binance, and Poloniex, among others.
A collapse of USDT would be akin to evaporating the USD on the balance sheet of all these exchanges, and forcing immediate default for these exchanges. This would not merely cause short term havoc, this would likely set crypto back significantly in price and more importantly, reputation.
One point of note is that exchanges without USDT are likely safer. Gemini and Coinbase are two of these exchanges. For other exchanges, good luck.
The Way Forward for On-Chain Fiat/Stablecoins
I don’t pretend for a second to know how to unwind the USDT bamboozle. Tether could remedy this by putting real USD/USDT buys on other exchanges, to allow for true USD redemption. But they likely won’t.
There is a real need for on-chain fiat or stable value tokens to use as a relatively low volatile store of value and serve as a trading pair for all other cryptocurrencies. Fortunately, there are a few projects in the making that allow for some sort of On-Chain Fiat or Stablecoins, all with different approaches with varying degrees of complexity and chance of success.
Gold Backed Tokens
The gold backed token. There are a several providers out there, including OneGram and GoldMint. How gold backed tokens work in essence is: take ICO money -> buy gold and secure gold -> issue two tokens, one representing dividend rights and the other as the token backed by secured gold -> receive money from any transfer of gold backed tokens -> buy more gold, pay off management company, and then residual as dividends to holders.
As an aside, while this approach is relatively common place, this method is likely inferior to methods discussed below. Gold backed tokens are inferior because of the high cost of gold storage and routine audits, associated management fees, and transfer fees which act as friction on the system. On a positive note, there projects in the making which do not have these extrinsic to blockchain fees and therefore likely more efficient.
Stablecoins
Bring on the Stablecoins, most notably DAI from MKR.
DAI is the stablecoin, and MKR is the decentralized governance/capital cushion to keep DAI stable with respect to both fiat and other cryptocurrencies. The DAI’s target is against the IMF’s SDR, with an expected launch value of ~0.75 SDR or 1 USD. On a basic level, how it works is by holding collateral that can be liquidated according to a voted upon ratio by MKR holders. If the value of the collateral drops too much, then the collateral is sold in a forced auction for DAI. If the value of DAI gets too low, then MKR is minted and sold to add collateral into the DAI reserve.
While the concept seems to hold promise, one can’t help but wonder if there is an easier, less complex solution to fiat/stablecoins.
The Settlecoin
This doesn’t exist yet. But will be here soon™. Several large banks are already working on this type of solution, at first designed to be used internally or between banks, but could one day be used by your average crypto consumer. The Settlecoin works by simply having digitized fiat trade on a blockchain, redeemable at the one of the partner financial institutions. This approach is likely one of the end goals for OMG, by having a fiat gateway to the Ethereum blockchain.
The main problem here is the AML/KYC issue. If a financial institution allows their blockchain fiat to be transferable, then it becomes a nightmare for the institution to comply with AML/KYC regulations, especially when a recipient of the blockchain fiat attempts to redeem after the fiat exchanges many different hands.
Perhaps there is another way. I’m talking gift cards. Take Amazon gift cards — you can purchase them at any grocery and redeem the codes online. In fact, you can buy the codes online with a prepaid card without much in the way of AML/KYC. The codes themselves are freely transferable without AML/KYC requirements on the code provider. And best of all, Amazon gift cards are traded at nearly 1:1 parity with the USD. While not decentralized, this solution might be a stopgap before any true fiat hits the market.
Fedcoin
This one is easy. Take the two most promising Fedcoin projects: Bank of England and Bank of China — central bank issued, sovereign controlled digitized fiat. There is no need for a peg, this is true digitized fiat. Downsides are immediate and obvious. The fiat can be inflated at will, and the governments, with the keys to the system, can prohibit certain transactions. Oh and there is no privacy. Therefore, it is unlikely that this solution can serve as the benchmark trading pair for the/cryptocurrency market.
Ethereum as a Stablecoin?
Yes, Ethereum has been wildly volatile for the entirety of its existence, except for periods of stability at $42 and $300. But even those periods are short lived:
How can Ethereum be a stablecoin? The answer lies in the Proof of Stake. Yes, when thousands or millions of Ether get staked, the price of Ethereum will skyrocket, just like any other staking token. However, after that initial period, the Ether can now be valued based on transaction volume. There will be a fixed return on Ether and therefore a fixed value relative to other cryptocurrencies. With the help of derivatives and other methods to short Ether, the value of Ether will be stable enough in the sense that the value will fluctuate against a known return. Treat it like a PE ratio. It won’t be perfect, but will be good enough for trading pair usage and certainly better than any systems we have today.
Disclaimer: Not financial or legal advice. Do your own research, #DYOR. I hold crypto, but have no financial stake in the success or failure of Tether or Bitfinex. But if you think of a way to short Tether or bet on Bitfinex’s failure without getting murked by holding crypto, let me know.
I hold no Maker or Gold backed coins. I hold an insignificant portfolio % of OMG from the airdrop. I have Eth.
